10/10/2008 @ 5:40AM

Wages of Sin

Eric Langan is trying to build a national chain of strip clubs. LIke every other business, this one has its ups and downs.

Eric Langan, a tall blond Texan, clambers out of a black Escalade in front of the Wynn Las Vegas on a recent afternoon, looks down and stops dead. The chief executive of
Rick’s Cabaret International
has a lunch date with a Sin City gossip columnist. He has discovered that instead of the navy suit he thought he put on at the crack of dawn, he is wearing rumpled black pants and a blue jacket. Shrugging off the mismatch, he slings his jacket across his shoulder, gang-member style.

Inside the Wynn, Langan greets Norm Clarke, the eye-patch-wearing columnist at the Las Vegas Review-Journal. “We want people to know that we’ve arrived,” says Langan over lunch, staring Clarke in the face. He confirms to the rumormonger a long-standing tale that in 2000 Caesars Palace made a deal with Langan to open a Rick’s Cabaret at the casino. No gaming joint along the Strip had ever had a strip joint. The deal fell through after Caesars’ owner, Arthur M. Goldberg, died two months later, Langan confides. The story leads Clarke’s column the following day, announcing that Langan has indeed arrived in Vegas–not at Caesars Palace but at a more modest locale: the former Scores strip club, which Langan had bought four days earlier. He paid $12 million in cash, plus a $3 million convertible debenture bearing 8% interest, plus 200,000 restricted shares of common stock.

Say what you will about a chain of jiggle joints, it’s a pretty solid business, even in a recession. Attracting 70,000 customers a month to its 19 clubs, Rick’s netted $7 million on $50 million in revenue over the most recent 12 months. Its five-year growth in sales (15% annually) and earnings per share (48%) push the company to No. 87 on our list of the 200 Best Small Companies. Small it is: The $81 million market value is, in Wall Street terms, microscopic.

Rick’s counts some respectable institutional investors, like
Barclays
and
Morgan Stanley
, among its stockholders, but this may be not so much an endorsement of either its price/earnings ratio or its line of business as an artifact of index investing.

Langan, who has acquired five strip joints this year, wants to go full throttle on his roll-up. “The first one to build the brand will win,” he opines. Maybe–if you think there’s a first-mover advantage in an old profession. Langan’s competitors include publicly traded adult entertainment chain VCG Holdings of Denver, with 20 clubs.

Headquartered in Houston, Rick’s is still mainly a regional player, with 12 clubs in Texas. It’s in 11 cities, including, besides Houston and Vegas, New York, Miami, Philadelphia, Dallas and New Orleans. Langan wants to be in 30. On the side, Rick’s recently bought a few magazines and Web sites–like Naughtybids.com, an Ebay for sex toys, and Couplestouch.com, a swinger’s site. The company is beginning to resemble a fledgling
Playboy Enterprises
.

Langan insists that he runs a clean business. For years strip clubs have been magnets for drugs, shootings and prostitution; managers have been accused of cash skimming and credit card gouging. Langan polices his 1,800 employees and 3,000 “entertainers” with two pages of house rules, a “house mom” who enforces them and video cameras. Rick’s financial controls resemble those of the gaming industry: Cash is managed through a so-called cage system, which keeps receipts away from club managers. At the Rick’s Manhattan branch on West 33rd Street, for example, bartenders and waitresses pick up the cash drawer from a cashier in a basement bunker built with 14-inch concrete walls and bulletproof glass. At the end of a shift they return to the cage and tally sales with a cashier, matching them to receipts. The two agree on the total, and electronic charges are immediately transmitted to headquarters in Houston. The cash is sent separately.

According to the rules, sex in a Rick’s club is verboten. So are drugs and foul language. Dancers can drink with customers but aren’t allowed to date them. (The rules don’t restrict fraternization between the boss and the entertainers. Langan met his third wife at the Houston club where she danced.) Entertainers can go topless, but not naked, except in its clubs in Florida and Texas, where that kind of entertainment is legal. Clients can get lap dances from the entertainers, but they aren’t allowed to grope them. There are upstairs rooms for private audiences between customers and dancers. Ostensibly, mischief is limited by diaphanous drapes.

Like many a plumber or package deliverer, Rick’s dancers are self-employed. Instead of W-2s in January they get 1099 income reporting forms and are responsible for income taxes on their own. Presumably they are scrupulous about estimated tax bills. Not Rick’s worry.

Many of these young women are seasonal workers, like the hordes of long-legged Russian college students on summer break. This year Rick’s hosted auditions for dancers from South Africa, Brazil and Australia. They get 100% of the fee for a three-minute dance ($20) and two-thirds of the take for the private audiences ($700 to $1,000). Tips are theirs.

When an employee–excuse us, an independent contractor–arrives for an evening shift at Rick’s in New York, she takes an elevator to a checkpoint in the basement, where she swipes in with her thumbprint, pays the club a $100 fee and heads to her locker. The thumb swipe sends her name to a computer screen manned by a disk jockey upstairs, who adds her to a lineup of other women waiting to dance on the center stage. Inside the club’s 4,000-square-foot dressing room the house mother covers up dancers’ tattoos with makeup concealer. “We don’t tolerate a trashy ghetto look,” says Rick’s daytime manager, Jola, an attractive middle-aged blonde from Poland, who declines to give her last name. Each club has a posted dress code, with the exhortation: “Remember, you need to look like a million to make a million.” Not everyone has learned that maxim. At the new Vegas club a flame-haired dancer opted for a hooker-chic look, wearing a body-hugging mini, white fishnet stockings and fur-lined go-go boots.

In New York entertainers begin their shifts by rotating through preselected positions on the main floor and inside Rick’s steak house, which offers Kobe-beef burgers and $3,500 bottles of Louis XIII cognac. On a recent evening a stockbroker by the bar charted ticker carnage and two young barflies seemed more preoccupied with their laptops than lap dancing. But in a nearby corner a tall brunette in a skintight turquoise gown and black stilettos scored. She leaned over a chubby customer, her long tresses falling all over his balding dome, as she breathed something into his ear–possibly the private room rates. (Dancers get what passes for training in the art of conversation–three questions about the customer, such as where he grew up or what he’s doing in town, before moving in for the kill.) The DJ segued to one of the entertainers’ favorite tracks, Katie Perry’s “I Kissed a Girl.”

Langan’s sales rise or fall on the quality of these interactions. “Without the girls, we’re just selling overpriced beer,” he says in a Texas drawl. He isn’t kidding: Rick’s buys Coors Lite for 63 cents a bottle but charges $12. Its Miami club sells so much booze–70 cases of vodka each month–that it needs three full-time inventory managers.

Langan says that women make up 30% of his clientele on weekends, most of them accompanied by their husbands or boyfriends. Go figure. His 15,000 vip members, who cough up a $500 annual fee, may get free champagne and desserts. Some are high rollers, spending $3,000 to $30,000 a night. That compares with averages of $200 in Texas and $600 in New York. One regular, who forks over $50,000 a month at a club, recently hosted a champagne dinner with two topless dancers as they watched Spider-Man 3. “He likes to pretend he’s on a date,” shrugs Allan Priaulx, Rick’s chief of investor relations. Another regular, a billionaire, spent $200,000 in four weeks this year. “It’s fantasy therapy,” says Langan. “A 60-year-old man loves a 20-year-old girl climbing all over him. He thinks she really likes him. That’s the lie. But she’ll keep liking him as long as he keeps paying.”

Langan has spent half his 40 years in the strip bar racket. Raised in southern Illinois, he moved to Dallas when he was 13 and in his late teens started dating a dancer, picking her up each night after her shift at a topless club. Four of her co-workers decided to live with them, a situation hardly conducive to hitting the books. After a semester of junior college studying accounting, Langan dropped out. He saw the money coming into his girlfriend’s club and decided to buy a shuttered topless club in Fort Worth in 1989. He reopened it, he says, using $40,000 he got from the sale of a baseball card collection.

Over the next four years Langan added three more clubs in Texas. He called them, not so subtly, xtc, and parked them in Taurus Entertainment, a holding company he purchased. In 1998 he began buying up stock in Rick’s (launched in 1983 and taken public in 1995). That same year he bought out Rick’s founder and became chief executive.

Ever since, he’s been on the prowl in a highly fragmented business: All but 130 of the 3,800 gentlemen’s clubs in the U.S. are privately owned and unaffiliated. Langan began building Rick’s by acquiring small fixer-uppers with seller financing. Three years ago, in addition to raising standard debt and equity, Langan started selling put options to investors that could be exercised for $3.25 a share in 2005. He now sells them for $25 a share.

At four locations in Charlotte and Houston Langan has focused on wealthy African-Americans with a brand called Club Onyx, where djs play hip-hop and R&B. But Langan is thinking much more broadly, looking for existing clubs in large cities with at least a million residents, a healthy convention business and an airport within 5 miles.

Rick’s is a family business. Langan’s father, a contractor, handles renovations at the clubs; one of his daughters, 21, is an accountant at headquarters. Langan’s mother was Rick’s payroll clerk until Langan canned her. Why? He says he wanted to help her pursue her dream of becoming a librarian: “I did it for her own good.” He himself makes out okay, bringing home $600,000 a year in salary. His stake in Rick’s is worth $11 million.

If Langan spends less time in the clubs these days, he still can’t take his eye off the business. In Vegas one of his big beefs is with cabdrivers, who have coerced club owners into paying $40 or $50 for every customer they bring to their clubs. Then there are the pains of integrating a new operation. Days after acquiring Scores Las Vegas, Langan returned to his hotel and got an urgent call just past midnight from the director of operations. “She did what?!” Langan yelled into the phone. A dancer had been caught violating the house rules with a Major League Baseball player in the parking lot. Langan was shocked. Sort of.